Executive Summary / Key Takeaways

• European Wax Center (EWCZ) is undertaking a strategic "reset" in 2025, focusing on strengthening its core business and operational foundation amidst a challenging macroeconomic environment that has pressured transaction growth and franchisee profitability.
• Despite a slight decrease in total revenue in Q1 2025, the company demonstrated resilience in Adjusted EBITDA and operating cash flow, supported by its asset-light franchise model and cost management efforts.
• Key strategic priorities include enhancing the data-rich marketing engine to drive new guest acquisition and reactivate lapsed customers, cultivating a more effective franchisee support infrastructure, and implementing a sophisticated development approach for thoughtful, profitable unit expansion.
• While net center closures are expected to outpace gross openings in 2025 as underperforming units are addressed, management is confident these foundational efforts will position the company to return to sustainable net unit growth by the end of 2026.
• The company's differentiated service model, proprietary products like Comfort Wax, and investments in technology and data analytics are viewed as critical competitive advantages in the fragmented out-of-home waxing market, supporting long-term market share gains despite intense competition from broader beauty retailers and salon chains.

The Foundation of a Niche Leader

European Wax Center, Inc. (EWCZ) stands as the undisputed leader in the fragmented U.S. out-of-home waxing services market. Founded in 2004, the company has built a significant presence, operating through a highly franchised network that reached over 1,000 centers across 45 states by fiscal year 2023. This asset-light model is a cornerstone of its financial profile, designed to generate capital-efficient growth and strong cash flow. EWCZ differentiates itself through a focus on delivering a superior, hygienic waxing experience administered by licensed, EWC-trained wax specialists. Central to this experience is the company's proprietary Comfort Wax®, formulated for a more efficient and less painful service, and the popular pre-paid Wax Pass program, which fosters guest loyalty and recurring visits.

The company's journey has seen periods of rapid expansion, particularly following the acquisition of EWC Ventures, LLC in 2018 and the subsequent formation of European Wax Center, Inc. for its 2021 public offering. However, recent years have presented headwinds, including a challenging macroeconomic environment impacting consumer spending and, consequently, transaction growth and profitability at the unit level. Management has acknowledged that the pace of prior unit growth may have been "a little too quickly," contributing to a cohort of underperforming centers. In response, EWCZ is currently undergoing a strategic recalibration, positioning 2025 as a "reset year" focused on reinforcing its operational and marketing capabilities to stabilize the business and lay the groundwork for renewed, sustainable growth.

Competitive Landscape and Strategic Positioning

Operating within the broader U.S. beauty and personal care services market, EWCZ faces competition from various players. Direct competitors include other waxing-focused chains, independent salons, and beauty retailers like Ulta Beauty (ULTA) and salon operators such as Regis Corporation (RGS) that offer waxing and hair removal services as part of a wider service menu. Indirect competition comes from at-home hair removal products and specialized laser hair removal providers.

EWCZ holds a dominant position in its specific niche, being approximately 11 times larger than its closest competitor in terms of system-wide sales. Its highly franchised model provides extensive geographic reach and market penetration, a key advantage over competitors with more limited footprints. While larger players like ULTA benefit from significant scale, vast retail networks, and robust digital integration, EWCZ's specialized focus allows for expertise and efficiency in waxing services that generalist providers may lack. For instance, EWCZ's specialized training and proprietary products are intended to offer faster and more precise waxing processes compared to broader salon services.

However, EWCZ's reliance on franchisee performance introduces dependencies and potential operational inefficiencies compared to vertically integrated models. While EWCZ's operating margins (10-12% TTM) are competitive with or exceed those of some broader salon operators like RGS (5-7% TTM), they trail larger, more diversified beauty retailers like ULTA (14% TTM). EWCZ's revenue growth has also lagged behind some competitors recently, reflecting the impact of macro pressures on its core service offering and the challenges within its franchise network.

To counter competitive pressures and capitalize on the estimated $7 billion out-of-home waxing market opportunity where EWCZ currently holds less than 15% market share, the company is strategically focusing on enhancing its core strengths. This includes leveraging its brand recognition, which has seen a 22% increase in awareness year-over-year, and investing in technology and operational support to drive traffic and improve unit-level economics. The strategic reset aims to solidify its leadership by improving execution and profitability, thereby strengthening its competitive moat against both niche and broader beauty service providers.

Technological Edge and Operational Innovation

Technology and operational innovation are increasingly vital components of EWCZ's strategy to enhance the guest experience, improve franchisee efficiency, and drive growth. At the core of its service delivery is the proprietary Comfort Wax®, a key differentiator designed to provide a superior waxing experience. While specific quantifiable performance metrics for Comfort Wax relative to competitors are not detailed, its role in the "unparalleled" guest experience is emphasized as foundational to brand loyalty.

Beyond the physical product, EWCZ is making deliberate investments in its digital and data infrastructure. The company has been building a data-rich, digital-first marketing engine. This involves implementing technology to link marketing interactions to guest visits, allowing for better measurement of advertising effectiveness and enabling more efficient media buying with lower costs per acquisition. The goal is to leverage this enhanced data utilization for more targeted and effective digital and social media campaigns.

Furthermore, EWCZ is upgrading its operational tools and support systems for franchisees. This includes deploying new tools for enhanced tracking and accountability at the center level and increasing engagement with its learning management system to improve operational execution. A significant investment is also being made in upgrading the market planning tool to a purpose-built solution with enhanced analytics and forecasting capabilities. This aims to support a more sophisticated and profitable approach to new center development by identifying underpenetrated, high-potential trade areas and implementing a rigorous site approval process.

The company is also exploring new modalities and service offerings, notably through its laser hair removal pilot. While the broader expansion of this pilot was paused to refine the test, the initiative is viewed as a potential opportunity to add new guests and increase share of wallet, potentially having a material impact on franchisee financial health. Investments in this area include dedicated laser expertise and marketing talent.

These technological and operational advancements are intended to provide tangible benefits: improved marketing ROI driving new guest acquisition, enhanced operational efficiency and guest experience supporting retention and higher ticket values, and smarter site selection leading to more successful new unit openings. For investors, these efforts represent strategic investments aimed at strengthening the competitive moat, improving unit economics, and fueling future growth, particularly as the company targets a return to net unit growth by the end of 2026.

Financial Performance Review

European Wax Center's financial performance in the first quarter of fiscal year 2025 reflects the current transitional phase and the impact of the challenging macro environment, alongside strategic investments. Total revenue for the 13 weeks ended April 5, 2025, decreased slightly by 0.9% to $51.4 million compared to $51.9 million in the prior-year period. This modest decline was primarily attributed to a decrease in transactions at existing centers and lower product sales, partially offset by revenue contributions from net new center openings.

Breaking down the revenue streams, product sales, which constitute the largest component (56.1% of Q1 2025 revenue), decreased by 2.1% to $28.9 million. This was driven by lower transaction volumes and the removal of a COVID-related surcharge to franchisees, partially mitigated by sales to new centers. Royalty fees, based on franchisee sales, remained largely consistent at $12.4 million (24.2% of revenue), with gains from new centers offset by declines from closures. Marketing fees saw a slight increase of 1.5% to $7.2 million (14.0% of revenue), also influenced by unit count changes. Other revenue, including corporate-owned center sales and franchise fees, increased by 2.8% to $2.9 million.

From a profitability standpoint, the company managed costs effectively in some areas while increasing investment in others. Cost of revenue decreased by 1.8% to $13.3 million, aligning with the decrease in product sales. However, Selling, General and Administrative (SG&A) expenses saw a significant increase of 13.9% to $15.3 million. This rise was primarily driven by higher payroll and benefits, including equity-based compensation for newly hired executives and severance costs, as well as increased corporate marketing spend, partially offset by lower franchisee conference expenses. Advertising expenses decreased by 16.6% to $7.2 million, reflecting efforts to optimize spending.

Despite the slight revenue dip and increased SG&A, Adjusted EBITDA for Q1 2025 increased by 7.2% to $18.8 million, resulting in an Adjusted EBITDA margin of 36.5%. This margin expansion, exceeding the full-year expectation of approximately 33%, was attributed to the timing of revenue, advertising, and SG&A expenses benefiting the quarter. Net income attributable to European Wax Center, Inc. decreased by 37.3% to $1.7 million, impacted by the factors mentioned above and a higher effective tax rate (35.0% in Q1 2025 vs. 24.9% in Q1 2024), influenced by non-deductible officer compensation and other items.

The company's balance sheet remains healthy, with cash and cash equivalents increasing to $58.3 million as of April 5, 2025. Net cash provided by operating activities was strong at $12.7 million for the quarter, demonstrating the cash-generative nature of the business model even in a challenging environment. The $40 million revolving credit facility remained undrawn. The company's long-term debt stood at $373.6 million, with a net leverage ratio of 4.3x (approximately 3.8x excluding stock buybacks). The company continues to utilize its free cash flow for strategic purposes, including share repurchases ($1.1 million used in Q1 2025) and debt repayment.

Strategic Execution and Recent Progress

EWCZ's management, under new leadership, is actively executing against its stated priorities to navigate the current environment and reignite growth. The focus is squarely on driving sales, improving 4-wall profitability for franchisees, and implementing a more strategic approach to unit expansion.

Progress is being made on building the data-rich marketing engine. The company has implemented technology to better measure advertising effectiveness and is leveraging data with digital and social media partners to improve efficiency and lower the cost per acquisition. Early signs of traction are reported, with sequential improvement in new guest trends on a 2-year basis each month in Q1 2025. Efforts are also underway to increase engagement with noncore guests through email and SMS. Extensive research has been conducted to redefine the target guest profile and refine brand messaging, with new creative assets being developed for the peak summer season.

To support franchisees and improve 4-wall profitability, the company is increasing the capacity of its support team and deploying new tools for enhanced tracking and accountability. The operations team is driving increased engagement with the learning management system, and these actions have begun to generate KPI improvements in underperforming centers. Management is also actively partnering with franchisees to address the challenges in underperforming units, which are primarily facing Average Unit Volume (AUV) issues.

Regarding unit development, the company is shifting towards a more sophisticated and thoughtful approach. While 2025 is expected to see net closures, the focus is on identifying underpenetrated trade areas with strong demand to prepare for 2026 openings. The upgraded market planning tool and rigorous site approval process are intended to ensure future expansion is profitable and sustainable.

The company has also made significant strides in assembling a new executive team, including a new Chief Financial Officer, Chief Commercial Officer, and Chief Information and Digital Officer, to lead the execution of these strategic priorities.

Outlook and Guidance

European Wax Center has reiterated its fiscal year 2025 outlook, signaling confidence in its strategic plan despite the uncertain macro environment. The guidance is based on the assumption of a stable consumer environment throughout the year.

For fiscal 2025, the company expects:

• Net Center Openings: 28 to 50 net center closures, resulting from 10 to 12 gross openings and 40 to 60 center closures. This reflects the strategic reset year focused on addressing underperforming units before resuming net growth. Q2 2025 is expected to see 7 to 8 net closures.
• System-Wide Sales: Between $940 million and $960 million, representing approximately flat year-over-year growth at the midpoint.
• Same-Store Sales: Flat to positive 2%, assuming some sales recapture from comp store closures. Q2 2025 same-store sales could be flat to down slightly due to the Easter holiday shift.
• Total Revenue: Between $210 million and $214 million, approximately 22.3% of system-wide sales.
• Adjusted EBITDA: Between $69 million and $71 million. This includes expected SG&A growth driven by investments in personnel and normalized incentive compensation.
• Adjusted Net Income: Between $31 million and $33 million.
• Capital Expenditures: $9 million to $11 million, including approximately $6 million non-cash, supporting investments in marketing and technology.

The high end of the outlook assumes that the company's marketing and guest engagement efforts begin to significantly drive traffic and improve trends in the second half of 2025. The lower end assumes that while progress is made on strategic priorities, meaningful top-line impact is delayed until 2026, and modest transaction declines persist in mature centers. Management anticipates returning to positive net unit growth by the end of 2026, following the successful execution of the 2025 reset initiatives.

Risks and Challenges

While EWCZ has a clear strategic plan, several risks and challenges could impact its execution and financial performance. The uncertain consumer environment remains a primary concern, potentially continuing to pressure transaction volumes and franchisee profitability, which could exacerbate closure rates beyond current expectations. Inflationary pressures, particularly on rent and labor costs in certain regions like California, continue to strain franchisee economics.

The company's reliance on a limited number of key suppliers for its proprietary products, including international sourcing for Comfort Wax, exposes it to supply chain disruptions and potential cost increases, including those related to tariffs. While management is actively working to mitigate tariff impacts, these efforts may not fully offset cost pressures.

Execution risk is inherent in the strategic reset. Successfully developing a data-rich marketing engine, enhancing franchisee support, and implementing a more sophisticated development approach require significant operational capabilities and franchisee buy-in. Failure to achieve meaningful traction in driving new guests and improving unit economics could delay the return to net unit growth and impact financial performance.

Furthermore, the company's substantial indebtedness and obligations under the Tax Receivable Agreement (TRA) represent financial risks. While current liquidity appears sufficient, potential acceleration of TRA payments under certain circumstances could require additional financing.

Competition from both specialized and broader beauty service providers remains a constant factor. While EWCZ holds a leadership position, maintaining and growing market share requires continuous innovation and effective execution to differentiate its offering and value proposition.

Conclusion

European Wax Center is at a pivotal juncture, strategically pausing aggressive unit expansion in 2025 to focus on reinforcing the core business and addressing operational challenges exacerbated by a tough macroeconomic backdrop. The investment thesis hinges on the successful execution of this "reset" year, which prioritizes enhancing marketing effectiveness, strengthening franchisee support, and implementing a more disciplined approach to future growth.

Despite a slight dip in recent revenue, the company's asset-light model continues to generate solid operating cash flow, providing the financial flexibility needed to invest in key initiatives like advanced data analytics, updated operational tools, and the promising laser pilot. While the expected net center closures in 2025 signal near-term headwinds and the need to prune underperforming units, management's commitment to returning to sustainable net unit growth by the end of 2026 provides a clear long-term objective.

EWCZ's differentiated service, proprietary products, and investments in technology offer a competitive edge in the fragmented waxing market. However, success will depend on the ability to effectively drive new guest acquisition and improve unit-level profitability amidst ongoing consumer caution and inflationary pressures. For investors, EWCZ represents an opportunity to invest in a market leader undergoing a necessary strategic recalibration. The key factors to watch will be the tangible results from the enhanced marketing and operational initiatives, the pace of improvement in unit-level economics, and the company's progress towards resuming profitable unit expansion as guided.